Microsoft has a very interesting perspective on product pricing. It is clear that Microsoft looks at the market and prices its products competitively. But there have been occasions when Microsoft is introducing an innovative product. How does it decide then?
In these instances Microsoft takes the low-price strategy. Microsoft worries about competitors even when it has a very large market share. If there are important differences in the prices of competing products, a lower-quality and lower-priced product might have a larger market share than a higher-quality higher-priced product. Ford sells more Tauruses and generates higher revenues than Mercedes-Benz does with its mid-sized sedan, though Mercedes would normally be considered to be of substantially higher quality. Microsoft tries to produce Benz-like products at Ford-like prices. Let's look at one particular product for this discussion.
Microsoft introduced a spreadsheet product called "Excel". The market was already dominated by another product.
Lotus commanded an enormous share of the market, and really didn't take the introduction of Excel very seriously. For one thing, in any one-year, the list prices for competing products don't differ by very much. Lotus normally charged in the vicinity of $500 for 1-2-3, and that was about what Microsoft charged for Excel. Quattro Pro was listed at just about the same price as the other two products.
As each product fought for market share, Microsoft was preparing a strategy it had used in other markets. Microsoft will lower its prices as it increases its market share. This is not the usual company strategy. Usually demand causes prices to stay high. But demand coupled with market share allowed Microsoft to do the unthinkable. As demand increases it lowers its prices. The typical price for a spreadsheet had fallen to approximately $50, a fall of over 80 percent.